Medical Services- Demand versus Need

A Comment
HEINZ F. MUELLER, B.S., M.A. WALTER H. UPHOFF, B.S., Ph.M. HERBERT ZOELLNER, Ph.D.

Commenting on an earlier paper in this Journal (January, 1971) which discusses "demand" and "need" for medical services, the authors present another framework for analysis. A rejoinder by the authors of the original paper follows.

J. R. Jeffers, M. F. Bognanno, and J. C. Bartlett in their January, 1971, article in this Journal' endeavored to eliminate confusion with respect to the economic concepts of "need" and "demand" for "market shortage" and "normative shortage" of medical services. Their assumptions may be summarized as follows: Assume (a) that medical services can be measured in units of uniform quality, as can be done with oranges or pencils. Assume (b) that the market for medical services is perfectly competitive. This implies further that the commodity produced (medical service) is homogeneous in quality and geographical accessibility and that the number of suppliers is so large that none of them can influence price. On the basis of the above assumptions "a" and "b," the concepts of need, demand, and shortages are clearly

Mr. Mueller is Economist for the Colorado-Wyoming Regional Medical Program. Mr. Uphoff is Professor of Economics at the University of Colorado's Center for Labor Education and Research and HMO Program Consultant on an HEW grant to the Minneapolis-St. Paul Group Health Plan. Mr. Zoellner was research assistant to Uphoff at the University of Colorado while completing work on his Ph.D. and has accepted a position with the World Health Organization in Geneva, Switzerland, as Economist for the Operational Research Unit, Division in Epidemiology and Communications Science. This paper was submitted for publication in November, 1971.
54
AJPH JANUARY, 1974, Vol. 64, No. 1

defined and can be found in any elementary textbook of economics. When all variables affecting supply and demand of a commodity other than quantity and price are held constant, the concepts can be conveniently illustrated by the authors' Figure 4 (p. 54). At price OPO, the quantity OZ which the suppliers are willing to provide is just equal to the quantity OZ that the consumers are willing to buy. The market will be cleared and there is by definition no market shortage. The quantity needed, i.e., judged necessary or desirable by experts or whosoever, is ON. There is therefore a normative shortage of ZN. At price OP1, the quantity OA which the suppliers are willing to sell is smaller than the quantity OB which the consumers are willing to buy. The market shortage at this price is therefore AB. The total shortage is AN. The authors consider BN the normative shortage (p. 56). We think it better to call the quantity AN both total and normative shortage. All the consumer can get at price OP1 is the quantity OA; the providers have to confine effective demand to this quantity by nonprice allocation (rationing). The authors are mistaken when they assert that at zero price 0 the consumers will acquire only the quantity OC and not more (p. 56). Instead, the consumers will obtain any quantity beyond OC at zero price, which they feel they need and until they face nonprice barriers. The authors proceed then to apply these concepts in

Price

P2S

P0
P1
0

S/
A
Z

Quantity

figure 1 Aggregate demand, supply. and need. DD', demand function for given population and time period. SS'. supply function for given population and time period. NN, need function for given population and time period. (Reprinted from Jeffers et al. 1).

the market for medical services. They correctly identify these following imperfections in the medical market (pp. 54-55): (a) the consuming public is "vastly ignorant and uninformed" with respect to medical services*; (b) consumption decisions are for the most part made by the health providers; (c) the entry into the medical industry is restricted at both the schooling and licensing levels; and (d) the medical care prices are administered by the suppliers at discriminatory levels (sliding fee schedule). The authors infer then that the price for medical services is kept below equilibrium level on a voluntary basis by the providers, because of their altruistic motives and to justify the "public trust" invested in them (pp. 54-55). If the actual price is below equilibrium (OP1 instead of OPO), a market shortage (AB) results. It is a well known fact that the price index of medical care has been rising faster than the general price level.3 t The authors consider this an indication that the price is approaching equilibrium, thus gradually eliminating the supposed market shortage. As a subsidiary argument, they point out that the philanthropic motives of health professionals-the authors' argument for the supposed existence of a market shortage-have gradually been undermined by increased financial capacity on the demand side and more businesslike management on the supply side. As a result, their argument continues, indigent consumers who were previously subsidized by health professionals or other philanthropy are now "identified as part of our nation's health bill" (see pp. 56, 58, and footnote 22 on p.

Unfortunately, things are not that simple. First, the upward surge of the price index for medical care need not (or only marginally) be related to the decreasing altruism of suppliers. The demand for medical care has been increasing (rightward shifts of the demand function DD') due to higher incomes, the growth of third party payments, and greater consumer awareness. The supply has probably been increasing (rightward shifts of the supply function SS') much less in relative terms, even if we take productivity advances into account. Under these assumptions, continued shifts in the supply and demand functions result in a continued increase of the equilibrium price itself.T The observed price rise can therefore be explained a priori without resort to decreasing market shortage. In perfect markets, a substantial price rise over and above general inflation would have brought about an increase in supply able to sustain a "normal" long term price (net of general inflation). This has not happened because the market itself is far from being perfectly competitive. The authors themselves note the factors of (a) restrictions to the market entry of health professionals (imperfection c); discriminatory pricing (imperfections a and b interrelated); and (c) the "unavailability of health services to the poor, the rural, and those residing in the inner core of our nation's urban centers" (p. 55). The authors, however, do not draw the necessary inference that a market analysis in terms of perfect competition is not warranted. The factor of discriminatory pricing leads us to discount the empirical importance of benevolent pricing and therefore of market shortage. Discriminatory pricing could be due to monopolistic and oligopolistic practices rather than altruism: health providers would price their services according to the ability-to-pay class of consumers or other discriminatory criteria, 1 while they attempt to maximize revenues.a This behavior is possible, since
: This assumes that the price elasticities of both supply and demand functions are neither totally inelastic nor totally elastic and that the income elasticity of demand is not zero. For some recent estimates of demand elasticities, see the papers and comments in References 7 to 10. Note that market shortage is only defined with respect to a given set of supply and demand functions. When the functions change (shift), market shortage changes, too: the change in market shortage depends on the relative shifts in the supply and demand functions, their curvatures (shapes), and the old and new levels of actual price. The resulting "shortage" due to market imperfection is conceptually different from both market and normative shortages. One compares the smaller actually supplied quantity in the imperfect market with the larger quantity that would have resulted in a perfectly competitive market. The difference in actual and competitive quantity supplied (under identical demand conditions) is then the measure of this kind of "shortage" due to market imperfection.' l 11 Price discrimination between richer and poorer patients is probably declining. But price discrimination between desirable and undesirable persons in terms of social and treatment preferences may be increasing. A fee schedule, for example, hides wide variations in time and attention offered to consumers.6 a One recent empirical study finds evidence that the
DEMAND VERSUS NEED

62).
* Here we see the uneasy marriage between demand based on consumer sovereignty and need as perceived by the professional supplier. For the consumer, "once he puts himself into the hands of the professional, demand disappears and no substitute exists for trust in the professional's concept of need."2 t The observed price increase may overstate the actual increase, since productivity increases are neglected. On the other hand, the cost of treating five specific and common illness episodes has risen more rapidly than the medical care price index from 1951 to 1965.4 Another source of possible understatement is the neglect of the facts that providers have increasingly shifted the burden of travel onto the consumer and that providers have lowered amenity aspects of quality.5' 6

55

professionals make the consumption decisions for the most part (imperfection b) and since the consumer cannot re-sell medical services on the market. The unavailability of medical services in the above areas (reason c) needs explanation, since nobody has prevented professionals from supplying services in the poor, rural, and urban core areas. With increasing financial capacity of consumers in these areas to pay for health care (directly or via government subsidies), the reason seems to be more the social than the economic unattractiveness of these areas for health professionals. From a purely economic point of view, we should expect the opposite: scarce and often diminishing supply in the face of rising demand should generate higher provider incomes; this in turn should increase the entry of new providers, until the income potential is equalized regionally.* In any case, the relative strength of all those factors contributing to price increase cannot be established a priori, as the authors assume, but must be examined empirically. Second, the two assumptions, a and b, made by the authors, are difficult to maintain. The first assumption that medical services can be measured in constant quality units poses serious conceptual and empirical difficulties. In order to arrive at constant quality units of medical services, we have to be able to measure both quantity and quality of services. Many competing concepts have been used for quantity, such as physician visit or hospital day. Neither is really satisfactory.t The definition of quality poses even greater difficulties, since it relates to the change in health status.t Health does not depend on medical services alone but also on proper nutrition, sanitation, pace of living, environment, etc. The health contribution by additional medical services (all other factors held constant) is difficult to measure for society as a whole and can hardly be
higher the marginal revenue received by physicians for certain services, the more they were able to induce consumers to use these services. The same study also shows that the extent of the monopolistic marginal revenue is itself a function of the institutional arrangements for the purchase of physicians'services.1 2 * The availability of supply is itself a major determinant of whether latent demand becomes effective.' 3 There may exist, therefore, a "low availability trap" in these areas for purely economic reasons: consumers do not demand more because of low supply availability and supply does not expand because of low consumer demand. In addition, it may also be that altruistically low prices charged by some providers in these areas discourage new supply entry. Nevertheless, with increasing financial capacity of consumers in these areas, these economic factors will become increasingly irrelevant for explaining the relative lack of supply. t Physician visit and hospital day are more related to input than output measurement.' 4In addition, medical services include besides health services also validation services (e.g., life insurance examinations) and other consumer services (e.g., hotel services in hospitals).' ' T What people demand when they purchase medical services are usually not these services per se but rather good health. Health status becomes then one important determinant of demand.8 Medical services are probably not even the most relevant health input.2" ,1 6
56
AJPH JANUARY, 1974, Vol. 64, No. 1

established for a single service provided to an individual consumer. Other criteria used for measuring service quality are professional performance standards and the quality of technological or organizational aspects of service delivery.'7 Performance standards are best geared toward a single service, but they are neither directly relevant for consumer satisfaction nor better health.' Delivery aspects cannot be seen with respect to a single service but only in relation to the total health system. The second assumption of perfect competition is unwarranted as noted earlier: the above mentioned imperfections do not result so much in imperfect price adjustments in a perfect market than in an imperfect market itself. In addition, the "quasi-public" utility character of the medical industry (see p. 54) implies that medical services are not just "another" commodity but one with special importance for social welfare. A sick person may easily give rise to social (external) effects like contagion, productivity loss, etc., not to speak of the human suffering of entire families. There is therefore good reason for the government to interfere in the private medical market on the supply and/or demand sides and/or by regulating price as in the case of "public utilities." Which interferences should actually be performed depends on the amount of perceived but unmet needs and on the cost-benefit comparison for each intervention within the entire social system, including their political consequences. We agree with the authors that subsidizing consumers without increasing supply capacity is as wasteful as expanding supply without removing nonprice barriers such as lacking consumer access to medical services. Our policy recommendations are, however, not that one need not worry about rising prices where they eliminate a market shortage: we do not believe in its quantitative significance. Instead, public policy should aim at a better utilization of existing health manpower and resources by improving the technical and organizational productivity of the medical delivery system, by inducing a better regional distribution of supply, and by alleviating financial and other consumer barriers to service access.II Perhaps the authors would agree with our final policy
"The possibility of an acute conflict between the health of the individual and that of his society is a problem that has received scandalously little attention."' i On the other hand, many consumers believe in the curative potential of medicine and spend money, where no cures are available. Others rely solely on the physician where paramedical personnel could help as well and at lower price.1 6 This is understandable when the demand for medical care is primarily a demand for knowledge or at least the results of knowledge, as Boulding2 remarks: the carriers of knowledge are then considered by many as having also mythical qualities. The solution may lie in better consumer education about the actual preventive and curative power of medicine in general and that of physicians in particular. The popularity of present "doctor" series on television proves that we have a long way to go. One innovative approach for separating well from sick consumers and for increasing simultaneously supply productivity by a better division of labor between medical and paramedical personnel is that of Garfield.' 8

conclusions. We nevertheless disagree on. the appropriate framework for analysis: in our view it is the entire social system with its resources, priorities, and conflicts, and not the perfectly competitive economic market which neglects most relevant questions due to its very assumptions.

9.

10.

References
11. 1. Jeffers, J. R., Bognanno, M. F., and Bartlett, J. C. On the Demand versus Need for Medical Services and the Concept of "Shortage." Am. J. Public Health 61:46-63, 1971. 2. Boulding, K. E. The Concept of Need for Health Services. Milbank Mem. Fund Q. 44:203-219, 1966. 3. Rice, D. P., and Cooper, B. S. National Health Expenditures, 1950-67. Soc. Security Bull. 12-13, 1969. 4. Scitovsky, A. A. Changes in the Cost of Treatment of Selected Illnesses, 1951-65. Am. Econ. Rev. 1182-1195, 1967. 5. Harris, S. E. The Economics of American Medicine, p. 108. Macmillan Co., New York, 1964. 6. Reder, M. W. Some Problems in the Medical Care Industry. In Production and Productivity in the Service Industries. Studies in Income and Wealth, edited by Fuchs, V. R., Vol. 34, pp. 120-121, 152. Columbia University Press for the National Bureau of Economic Research, New York and London, 1969. 7. Anderson, R., and Benhan, L. In Empirical Studies in Health Economics. Proceedings of the 2nd Conference on the Economics of Health, edited by Klarman, H. E., and Jaszi, H. H., p. 73. Johns Hopkins Press, Baltimore, 1970. 8. Grossman, M. In Empirical Studies in Health Economics. Proceedings of the 2nd Conference on the
12.

13.

14. 15.

16.
17.

18.

Economics of Health, edited by Klarman, H. E., and Jaszi, H. H., pp. 98-99. Johns Hopkins Press, Baltimore, 1970. Rosenthal, G. In Empirical Studies in Health Economics. Proceedings of the 2nd Conference on the Economics of Health, edited by Klarman, H. E., and Jaszi, H. H. Johns Hopkins Press, Baltimore, 1970. Fuchs, V. R. In Empirical Studies in Health Economics. Proceedings of the 2nd Conference on the Economics of Health, edited by Klarman, H. E., and Jaszi, H. H. Johns Hopkins Press, Baltimore, 1970. Fein, R. The Doctor Shortage, An Economic Analysis, pp. 16-18. Brookings Institution, Washington, D. C., 1967. Monsma, G. N., Jr. Marginal Revenue and the Demand for Physicians' Services. In Empirical Studies in Health Economics. Proceedings of the 2nd Conference on the Economics of Health, edited by Klarman, H. E., and Jaszi, H. H., pp. 145-160. Johns Hopkins Press, Baltimore, 1970. Ginzberg, E. Contributed Comments on the Demand Analysis Papers. In Empirical Studies in Health Economics. Proceedings of the 2nd Conference on the Economics of Health, edited by Klarman, H. E., and Jaszi, H. H., p. 163. Johns Hopkins Press, Baltimore, 1970. Fuchs, V. R. The Service Economy, p. 126. Columbia University Press for the National Bureau of Economic Research, New York and London, 1968. Fuchs, V. R. The Contribution of Health Services to the American Economy. Milbank Mem. Fund Q. 44:77-86, 1966. Ginzberg, E., and Ostow, M. Men, Money, and Medicine, pp. 31, 91, 99, 267-271. Columbia University Press, New York and London, 1969. Donabedian, A. Evaluating the Quality of Medical Care. Milbank Mem. Fund Q. 44 :166-170, 1966. Garfield, S. R. The Delivery of Medical Care. Sci. Am. 222:15-23, 1970.

DEMAND VERSUS NEED

57